Credit: Arnaud Mesureur / UnsplashIndia’s Office Sector to See Significant Changes Amist COVID-19
April 8, 2020Real Estate
India has been on official lockdown for a week, and uncertainty continues to float throughout the real estate market, with no clear view of what is to come. Real estate leaders joined our latest eMeeting on April 3 to try and make sense of the storm the industry is about to see through. Over 100 members joined the discussion and agreed that the best time to prepare was last week the second-best time is right now.
India’s Office Sector to Wait-and-Watch COVID-19 Impact
The industry is taking a wait-and-Watch stance at the moment, but the longer the pandemic persists, the greater the impact it will have on the economy and the real estate markets. Members discussed that if the outbreak ceases to expand in the next three to four months, then the impact will be limited to the volume of real estate transactions. The Indian market is robust and has low vacancy rates. On a micro-scale it is strong but on a macro-scale, we would have to wait and see. Members see that various conversations are happening and that businesses are likely to delay real estate decisions or slow down their activities, adjusting their operations. Today’s priority is to ensure businesses’ strength to weather the storm.
The last two economic recessions, Dotcom in 2000 and Subprime in 2008, took approximately 1.5 to 2 years for the markets to recover. This is a different type as it is a humanitarian crisis and not just a recession, and hence will have a much stronger domino effect on the economy. Members feel that the situation has taken a severe turn as capital flight is returning to the US and gold prices have skyrocketed in the last three months.
During the last two recessions, it took approximately three to four months for tenants to return and start analyzing lease renewals and renegotiations. In the current crisis, members feel that India is likely to face the impact of a global recession in the 2H20. At the moment, tenants do not want to take positions and have started looking at force majeure events to delay their rent commitments. The focus right now is on safety and health of tenants, and making sure that assets fit the requirements.
How is China Recovering Post-Pandemic?
As of April 3, 80 percent of employees have returned to work and activity levels have increased to 60 percent of the pre-pandemic level. Chinese landlords are beginning talks on lease renewals earlier than usual, asking to renew now instead of waiting a year. This would result in a decrease in rent pressure. Nevertheless, China is starting to see a relapse of cases that were already treated, with more symptoms. Its financial curves fell in February, increased in March and are currently falling again and although there is a positive message from China, there continues to be a great deal of underlying instability.
Short-Term Actions to Define Market Leaders
The COVID-19 pandemic has made it difficult to see far into the future, complicating decision making and project timelines. During the discussion, members discussed that leases that were about to be closed, or in advanced stages, continue to move forward and there seems to be no indication of companies backing out.
When looking at leases that are to be renewed in the next year, members are seeing some reluctance to increase their rentals. Overall, it is expected that lease restructuring will be more frequent for medium-term renewals. Most tenants are looking to preserve cash and are adapting capital preservation measures, which means that at least 20 percent of the forecasted supply opportunities are likely to be pushed into 2021. For long-term contracts, tenants and landlords are expected to find a middle ground that would result in win-win situations for both parties. Members believe the market will slow down, resulting in a decrease in office demand.
Although uncertainty is stalling transactions, there are some factors that could generate silver linings for the Indian real estate sector. A silver lining members brought up was the depreciation of the US dollar as it slipped 10 percent, making it a major cost-benefit advantage for India from an operational and cost efficiency standpoint. Another is that with the tax breaks and people working from home, there is a greater opportunity for cost arbitrage, which could result in increasing balance sheets with profits that could act as a buffer for the next three to five months until the situation stabilizes.
Members believe that once the lockdown is over, banks are looking to either shift 20 percent of their workforce to work remotely or negotiate all of their properties. Members are also hopeful that the government will generate an economic package for after the lockdown, which includes a large amount of deficit financing and funds to be pumped into the system.
Long-Term Impact to Renew Office Market
As the air clears up in the next few months, the industry will be able to test the true impact in terms of business performance and assess how each operation has been impacted. The long-term impact on the industry is a factor of how it responds today. Members believe that all of these chances we are experiencing will trigger a new era of real estate thinking. Companies are asking themselves if they can engage with their workforce in a transparent manner and if they have plans. Those that can create a transparent organization where the senior leadership can build trust with its employees through elaborately designed plans, will emerge stronger.
Another factor that will be analyzed when the storm passes are the companies that stood by their tenants and that were able to meet the health, sanitation and regulatory frameworks including contract realignments through the tough times. Members believe that many will flock toward quality and service, which will help stabilize the market and strong players will continue to lead. On the other hand, a large amount of speculative supply that was envisaged by newer players will most likely decrease due to lack of capital. If the demand drops, primary access to financing will go to the most stable, more experienced players.
Working from Home: Will this trend be embraced?
Throughout cities like Bangalore, Chennai and Hyderabad, there are not many issues regarding operationality. Approximately 10-15 percent of the total workforce continues to go to the office, taking shifts to keep servers up and running. More people have begun working from home in the past weeks, but the country continues to face many challenges, apart from cultural hurdles, there are various technological issues such as data protection, firewalls, and employees not having the right tools to work from home. Members say that there are still some gaps as to how to tackle many issues that arise from remote working such as data security, productivity and client engagement. Nevertheless, the results until now have been encouraging.
The Un-Densification of Offices
In past years, densification became the norm when it comes to development, but will this trend change after this crisis? Members believe that the opposite could occur and that the new norm would be undoing densification or cellularization. Companies will begin to analyze how much space their employees require and their ability to densify their operations. This is bound to impact co-working spaces where the model is based on densification and having more people in less space, raising the question: will the market have to re-think this model? Members believe that this will be a trigger for an even bigger market transformation, which is something that sparks hope among the industry.
The Cautious Optimism
Members believe that the office market will have an overall positive outlook and it will have changes, but these changes will be the drivers of new trends and help the market grow. This optimism also spread to warehousing and logistics assets. There were some members that feel the optimism may be displaced and that it is too difficult to predict long-term impacts, despite the fact that India’s office space drivers are different. Some believe the commercial real estate sector in India will experience more pain, and that of course when compared to other assets such as hospitality and retail it would be less, but the market should prepare for a rough ride.
This information was discussed during our last GRI eMeeting with our India Real Estate members. Join the discussion and register for the next eMeeting here: https://www.griclub.org/emeetings.html
India’s Office Sector to Wait-and-Watch COVID-19 Impact
The industry is taking a wait-and-Watch stance at the moment, but the longer the pandemic persists, the greater the impact it will have on the economy and the real estate markets. Members discussed that if the outbreak ceases to expand in the next three to four months, then the impact will be limited to the volume of real estate transactions. The Indian market is robust and has low vacancy rates. On a micro-scale it is strong but on a macro-scale, we would have to wait and see. Members see that various conversations are happening and that businesses are likely to delay real estate decisions or slow down their activities, adjusting their operations. Today’s priority is to ensure businesses’ strength to weather the storm.
The last two economic recessions, Dotcom in 2000 and Subprime in 2008, took approximately 1.5 to 2 years for the markets to recover. This is a different type as it is a humanitarian crisis and not just a recession, and hence will have a much stronger domino effect on the economy. Members feel that the situation has taken a severe turn as capital flight is returning to the US and gold prices have skyrocketed in the last three months.
During the last two recessions, it took approximately three to four months for tenants to return and start analyzing lease renewals and renegotiations. In the current crisis, members feel that India is likely to face the impact of a global recession in the 2H20. At the moment, tenants do not want to take positions and have started looking at force majeure events to delay their rent commitments. The focus right now is on safety and health of tenants, and making sure that assets fit the requirements.
How is China Recovering Post-Pandemic?
As of April 3, 80 percent of employees have returned to work and activity levels have increased to 60 percent of the pre-pandemic level. Chinese landlords are beginning talks on lease renewals earlier than usual, asking to renew now instead of waiting a year. This would result in a decrease in rent pressure. Nevertheless, China is starting to see a relapse of cases that were already treated, with more symptoms. Its financial curves fell in February, increased in March and are currently falling again and although there is a positive message from China, there continues to be a great deal of underlying instability.
Short-Term Actions to Define Market Leaders
The COVID-19 pandemic has made it difficult to see far into the future, complicating decision making and project timelines. During the discussion, members discussed that leases that were about to be closed, or in advanced stages, continue to move forward and there seems to be no indication of companies backing out.
When looking at leases that are to be renewed in the next year, members are seeing some reluctance to increase their rentals. Overall, it is expected that lease restructuring will be more frequent for medium-term renewals. Most tenants are looking to preserve cash and are adapting capital preservation measures, which means that at least 20 percent of the forecasted supply opportunities are likely to be pushed into 2021. For long-term contracts, tenants and landlords are expected to find a middle ground that would result in win-win situations for both parties. Members believe the market will slow down, resulting in a decrease in office demand.
Although uncertainty is stalling transactions, there are some factors that could generate silver linings for the Indian real estate sector. A silver lining members brought up was the depreciation of the US dollar as it slipped 10 percent, making it a major cost-benefit advantage for India from an operational and cost efficiency standpoint. Another is that with the tax breaks and people working from home, there is a greater opportunity for cost arbitrage, which could result in increasing balance sheets with profits that could act as a buffer for the next three to five months until the situation stabilizes.
Members believe that once the lockdown is over, banks are looking to either shift 20 percent of their workforce to work remotely or negotiate all of their properties. Members are also hopeful that the government will generate an economic package for after the lockdown, which includes a large amount of deficit financing and funds to be pumped into the system.
Long-Term Impact to Renew Office Market
As the air clears up in the next few months, the industry will be able to test the true impact in terms of business performance and assess how each operation has been impacted. The long-term impact on the industry is a factor of how it responds today. Members believe that all of these chances we are experiencing will trigger a new era of real estate thinking. Companies are asking themselves if they can engage with their workforce in a transparent manner and if they have plans. Those that can create a transparent organization where the senior leadership can build trust with its employees through elaborately designed plans, will emerge stronger.
Another factor that will be analyzed when the storm passes are the companies that stood by their tenants and that were able to meet the health, sanitation and regulatory frameworks including contract realignments through the tough times. Members believe that many will flock toward quality and service, which will help stabilize the market and strong players will continue to lead. On the other hand, a large amount of speculative supply that was envisaged by newer players will most likely decrease due to lack of capital. If the demand drops, primary access to financing will go to the most stable, more experienced players.
Working from Home: Will this trend be embraced?
Throughout cities like Bangalore, Chennai and Hyderabad, there are not many issues regarding operationality. Approximately 10-15 percent of the total workforce continues to go to the office, taking shifts to keep servers up and running. More people have begun working from home in the past weeks, but the country continues to face many challenges, apart from cultural hurdles, there are various technological issues such as data protection, firewalls, and employees not having the right tools to work from home. Members say that there are still some gaps as to how to tackle many issues that arise from remote working such as data security, productivity and client engagement. Nevertheless, the results until now have been encouraging.
The Un-Densification of Offices
In past years, densification became the norm when it comes to development, but will this trend change after this crisis? Members believe that the opposite could occur and that the new norm would be undoing densification or cellularization. Companies will begin to analyze how much space their employees require and their ability to densify their operations. This is bound to impact co-working spaces where the model is based on densification and having more people in less space, raising the question: will the market have to re-think this model? Members believe that this will be a trigger for an even bigger market transformation, which is something that sparks hope among the industry.
The Cautious Optimism
Members believe that the office market will have an overall positive outlook and it will have changes, but these changes will be the drivers of new trends and help the market grow. This optimism also spread to warehousing and logistics assets. There were some members that feel the optimism may be displaced and that it is too difficult to predict long-term impacts, despite the fact that India’s office space drivers are different. Some believe the commercial real estate sector in India will experience more pain, and that of course when compared to other assets such as hospitality and retail it would be less, but the market should prepare for a rough ride.
This information was discussed during our last GRI eMeeting with our India Real Estate members. Join the discussion and register for the next eMeeting here: https://www.griclub.org/emeetings.html
